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1. Guaranteed Demand and Corporate R&D (with Sharon Belenzon), Management Science, 72(4): 2761-2787
The U.S. government incentivizes firms to develop innovative technologies by awarding research and development (R&D) contracts that often carry an implicit promise of “guaranteed demand.” Firms that demonstrate strong technological capabilities are rewarded with noncompetitive production contracts for the resulting products and services. Using newly assembled data on $4.2 trillion in government procurement contracts from all federal agencies, matched to U.S. publicly traded firms, we document a “crowding-in” effect, where government R&D contracts lead to increased investment in corporate scientific research. This effect is concentrated in large, vertically integrated firms and limited to upstream R&D. We argue that these patterns are best explained by a guaranteed demand mechanism: Firms co-invest in upstream research when success offers a credible path to future noncompetitive production contracts. We develop a theoretical framework to explain when it is optimal for the government to bundle R&D and production contracts. Our analysis shows that guaranteed demand can produce higher quality at a lower total cost for upstream R&D projects when the R&D firms have production capabilities. Our empirical results support these predictions. Additionally, we find that the crowding-in effect has weakened over time as the government has increasingly decoupled R&D contracts from production contracts. We discuss the potential implications of this decoupling.
2. The Effect of University Science on Corporate Innovation (with Ashish Arora, Sharon Belenzon, Lia Sheer, and Hansen Zhang), Forthcoming at Management Science
We study how three components of university science—university publications, PhD graduates, and university patents—influence both upstream and downstream innovation in U.S. publicly traded firms that conduct R&D. To measure the relevance of university science to corporate innovation activity, we use machine-learning algorithms and bibliometric data to link university publications, PhD dissertations, and university patents to corporate publications and patents. Identification exploits firm-specific exposure to shifts in federal agency R&D budgets. We find that university science affects corporate innovation primarily through PhD graduates and university patents: PhD graduates raise firm innovation, whereas university patents substitute for corporate patents and lower the need for internal research. In contrast, university publications elicit little direct contemporaneous response on average; however, this pattern varies substantially across sectors and firm capabilities, with stronger complementarities in the life sciences and among firms operating near the technology frontier. Because established firms account for more than three-quarters of all business R&D, understanding how their innovation responds to university publications, PhD graduates, and university patents is central to assessing the broader impact of university science on corporate innovation.
Media Coverage: The Economist, Marginal Revolution
3. Government-Funded Experimentation: How Startups Use R&D Contracts to Resolve Uncertainty (Job Market Paper), Forthcoming at Strategic Entrepreneurship Journal (Click here to download the PDF)
Startups use experimentation to reduce technological and market uncertainty, but experimentation is costly and unevenly funded. This paper examines how government-funded experimentation relates to subsequent performance among high-tech startups that receive federal awards. Using data on $32 billion in U.S. government R&D contracts awarded to high-tech startups between 2001 and 2018, I distinguish between technology experimentation, measured by the value of R&D contracts, and market experimentation, measured by the number of agencies awarding the R&D contracts. Market experimentation is positively associated with subsequent employment, sales, and acquisition, while technology experimentation shows weaker associations with these outcomes. The findings are consistent with startups using information from multiple government buyers to learn about market opportunities and improve subsequent performance.
4. The Private Value of Innovating for the Government (with Ashish Arora, Sharon Belenzon, and Elia Ferracuti), NBER Working Paper 33880 (Click here to download the latest PDF)
We quantify the private returns to government R&D contracts awarded to firms. We present new evidence that R&D contracts not only finance innovation but also embed an implicit government guarantee of noncompetitive future procurement for the winning R&D contractor. We measure its private value by analyzing stock market reactions to news about R&D contract awards. Using all federal R&D contracts awarded to U.S. publicly traded firms from 1984 through 2015, we find that the average private return on an R&D contract is 19 times its maximum potential revenue. However, returns are highly skewed, with only 7.5% of firms receiving at least one top-quartile contract. Private returns are linked to future production contracts, but only for noncompetitive awards to vertically integrated or large firms. These results suggest that a procurement regime bundling R&D and production contracts enhances value for firms with production capability. We develop a conceptual framework to clarify this innovation policy lever.
5. Who Appropriates Corporate Science? (with Ashish Arora, Sharon Belenzon, Lia Sheer, and Dror Shvadron)
Corporate scientific research can create value beyond firm boundaries, yet we know little about who ultimately captures that value. We trace knowledge flows from more than 700,000 corporate-authored papers published from 1990 to 2015 through subsequent publications to patented inventions. We find that 76 percent of the papers published by 2010 contribute to patents within a citation depth of four scientific publications, yet 97 percent of citing patents are owned by organizations other than the publishing firm. This indicates that firms rarely capture the full value from their scientific research. Yet publishing also generates benefits: other researchers write papers building upon corporate papers, which publishing firms later reabsorb into their own patents. Among papers that ultimately contribute to the publishing firm’s patents, about 75 percent do so through reabsorption of external follow-on research. Reabsorption has increased over time and is especially important for larger firms, which rely more heavily on knowledge developed outside their boundaries. These findings show that external knowledge production is not only a source of spillovers. It is also an intermediate stage through which firms commercialize their own science. Corporate publication can therefore create private value by inducing external research that firms subsequently incorporate into invention.
6. Short-Cycle Experimentation and Uncertainty Regimes
Short-cycle experimentation is promoted as a way to reduce uncertainty in early-stage ventures, yet its performance effects remain inconsistent. This study explains that variation by theorizing how its value depends on the dominant uncertainty regime. I distinguish between market uncertainty, which experimentation addresses well, and technology uncertainty, which it poorly resolves. Using data from 820 NSF I-Corps projects, I show that experimentation improves venture outcomes when uncertainty is market-driven but yields weak or misleading signals under technology uncertainty. These findings clarify why experimentation succeeds in some settings but fails in others and identify boundary conditions for effectiveness.
Work in Progress
7. Who Funds Science-Based Startups? (with Honggi Lee and Lia Sheer)
8. Funding Sources and Performance in High-Tech Startups (with Ashish Arora and Sharon Belenzon)
